Litigation: New ruling presumes prejudice for the destruction of ESI following an untimely litigation hold

A recent ruling from an influential federal judge on e-discovery obligations reinforces the importance of issuing timely litigation holds and exposes a new class of parties to sanctions for failing to do so.

On Aug. 15, 2013, Judge Shira Scheindlin, who authored the precedent-setting Zubulake opinions on e-discovery sanctions, issued an order that imposed an adverse inference jury instruction and monetary sanctions against a plaintiff who allowed electronically stored information (ESI) to be destroyed after issuing a tardy and sloppy litigation hold. In Sekisui Am. Corp. v. Hart, Judge Scheindlin overruled a magistrate judge’s ruling that refused to issue sanctions because the defendant could not show that it was prejudiced or that the plaintiff maliciously destroyed the ESI at issue. Those defenses have traditionally succeeded to the frustration of many attorneys and their clients who are often left with no real remedy for an opposing party’s grossly negligent actions in preserving ESI. Judge Scheindlin’s ruling in Sekiusi is significant because it rejected these defenses and found that neither proof of prejudice or specific intent to destroy were required for imposing sanctions.

The facts in Sekiusi are all too familiar to many e-discovery battles these days, but with a twist. Although the plaintiff threatened defendants with a lawsuit in October 2010, it did not actually commence the lawsuit until May 2012. After sending the shot across the bow in 2010, the plaintiff did not immediately implement a litigation hold like it should have. Instead, the plaintiff waited over 15 months to issue the hold. The plaintiff compounded its error by not issuing a hold to its outside ESI vendor. Because the plaintiff failed to issue a timely and proper litigation hold, it allowed certain ESI to be destroyed, including email folders of one of the main defendants in the case who was the plaintiff’s former president and CEO. After discovering these facts, the defendants promptly moved for spoliation sanctions.

The magistrate judge considering the motion declined to issue sanctions because the plaintiff’s failures constituted gross negligence at most and the defendant could not show they were prejudiced by the destruction of any ESI. In reversing the ruling, Judge Scheindlin disagreed and ruled that a party is not required to show it is prejudiced when ESI is destroyed through the willful or grossly negligent acts of the other party. Instead, she found that prejudice is presumed under such facts and that it is the spoliating party who should bear the burden of providing that the deleted ESI will not prejudice the other party. In addition, Judge Scheindlin explained that “the law does not require a finding of malevolence to constitute willfulness in the context of spoliation” and that sanctions are appropriate where the spoliating party has destroyed the ESI willfully or through gross negligence. Although sanctions were awarded that included an adverse instruction to the jury, her ruling deferred to the jury to the ultimate question of whether to presume that the destroyed evidence would have been favorable to the defendants.

In Sekiusi, Judge Scheindlin also took the opportunity to voice her disagreement with the proposed amendment to Rule 37(e) of the Federal Rules of Civil Procedure, which was published for public comment on Aug. 15, 2013 – the very same day her order in Sekiusi was filed. Specifically, she disagreed with the proposed changes that would require “the innocent party to prove that ‘it has been substantially prejudiced by the loss’ of relevant information, even where the spoliating party destroyed information willfully or in bad faith.” She also disagreed with the proposed rule’s structure that would not permit sanctions against a party “if they were negligent, grossly negligent, or reckless” in preserving evidence.

Although the precedential reach of this ruling is technically limited to the U.S. District Court for the Southern District of New York, Sekiusi serves as an important reminder to all in-house counsel and companies to timely issue litigation holds, especially when they are in the process of investigating and/or preparing to bring their own claims against another party. The case also provides an excellent guideline of e-discovery litigation hold requirements and the common pitfalls to avoid sanctions territory. Although a future amendment to Rule 37(e) in 2014 may take some of the teeth of Sekiusi’s bite, Judge Scheindlin’s ruling could also serve the basis for future sanction motions in situations where the spoliating party is grossly negligent in carrying out its preservation duties and where no prejudice to the other party is readily apparent.